Jumpy VIX Could Signal It’s Time For A Break

-- Henry Miller

Last week’s market action might be seen as an indication that the Bulls may be wavering in their conviction to some degree, as volatility in the market gained traction over the last three days of the week.

Certainly, the key events that triggered the higher levels of volatility could have easily left the major indexes with sharper drops then those suffered on Wednesday and Thursday. In a less robust market, the Nikkei’s 7% plunge alone could have been more than sufficient to knock the benchmark S&P 500 Index deeper into correction territory.

Likewise, it would have been no great surprise if the comments by the Fed’s Ben Bernanke regarding the increasing likelihood of a rapidly approaching endgame for QE3 had sent the market on a deeper dive than the one it experienced last Wednesday.

All things considered, the losses in the major indices were relatively small, as investors and traders seemed to continue the recent pattern of seeing market dips as buying opportunities rather than flight-from-risk moments.

Still, all three major indexes ended the week in the red, the first time that has occurred since the middle of April. While hardly a panic-button moment for the Bulls, it should serve, at the very least, as an attention-getter for investors.

The Dow Jones Industrial Average (DJIA) lost 0.3% for the week, while the benchmark S&P 500 Index (SPX) fell 1.1% over the same time period. The Nasdaq (COMP) also ended down 1.1% last week.

Trading volume was off by almost 20% on the major U.S. exchanges, though that is a common affair for the week proceeding a three-day holiday.

In terms of volatility, the Chicago Board Options Exchange Market Volatility Index (VIX), known as the “fear gauge,” moved within a 15% daily range on Wednesday and Thursday, in conjunction with the Nikkei and Fed concerns. While this range of movement is not considered staggering by any means, it is certainly deep enough to indicate that investor concerns are not far from the surface.

The VIX ended the week at 13.99, about 20% above its pre-crash levels seen in the first half of 2007. It is helpful to recall that the VIX tends to rise as the equity markets drop, and vice versa, as well as noting that you can’t directly trade the VIX.

If you don’t currently track the VIX, it might not be a bad time to keep an eye on the index. A toppy U.S. market, a nervous one in Japan, and a Fed that seems about ready to pull the easy-money plug combine to make the monitoring of the fear gauge worthwhile.

What The Periscope Sees
The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. This week finds Consumer Goods atop the SectorCast Rankings for one of the few time this year, followed closely by Financials and Technology.

IYK (iShares Dow Jones U.S. Consumer Goods Sector Index Fund) is up 19.47% year-to-date, as of the last week of May.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”